WHY COMPETITORS OPEN THEIR STORES NEXT TO ONE ANOTHER

Over the years, businesses have been known to select their store locations as far away as it can be from their competitors. This is due to the thought that by doing so, competition will be minimal if not existent. However, in the Mall Age, businesses especially franchises are setting up shop in the same locations. Nowadays, it’s easy to spot fast food joints, gas stations, restaurants, clubs or even cafes’ crowded in one area comfortably doing business. Fast food restaurants such as KFC, Urban Burger and Subway always seem to be fighting for store spaces at certain central spots that can lure more customers. Gas stations such as Kenol Kobil, Total and Oil Libya are strategically positioned on major roads to get a piece of the market share in same locations. Does it really make sense at all? Is it worth it in the long run? Scientists have studied this occurrence using game theories such as the Hoteling’s Model of Spatial Competition, Nash Equilibrium and Social Optimal Solution that best explain the question, WHY?

The Hotelling’s Model of Spatial Competition theory

It suggests that a business is interested in setting up branches at the most central place to attract the highest number of clients in that vicinity. However, all businesses think in the same way and therefore leads to the clustering in one part of a particular street. For example, assuming there are two restaurants on the same street, 100 meters apart. While doing business, the businesses first agree to maintain the space between them so that each business can get a share of customers in their area. However, as time goes, and competition becomes greater, the stores begin to move towards the central point between them to maximize the number of customers. This, in turn, attracts similar businesses which then join in the fight for space in that particular area.

The Nash Equilibrium theory

This theory holds the opinion that businesses choose options that have their interests at heart without caring about their competitors’ actions. It, therefore, means some franchises or companies don’t mind being next to their competitors as long as they find the location lucrative in terms of customer numbers. In this case, the businesses resort to applying marketing strategies that set them apart from the other businesses. They now have to create publicity and differentiate their products, services and the experience they sell. The pricing strategies come into play when a potential client visits all stores and finds out the products are actually or quite similar.

The Social Optimal Solution theory

The theory suggests that when businesses are located in the same area, they all get the market share equally depending on the services they offer. It regards the closeness as a win-win situation for the different brand names. Firms are unstable in this arrangement since they will always move to the optimal position and hence break agreements on location change.

Companies always want to keep their competitors as close as possible to learn new strategies from them and develop better ones. Clustering around a particular street position enables customers to avoid walking long distances to get to their favourite joint. It also helps them try new stores and compare services and therefore some businesses gain or lose clients. New businesses also use these game theories to benefit from the already established customer base from big brand names.